What are the rules governing insurance agents in Texas on rebates, referrals and rewards, and why do they matter?
For starters, at a minimum, an agent could lose their license for violating rules regarding such activities. And, they could potentially be on the hook for a $25,000 fine per violation, according to Lee Loftis, governmental affairs director for the Independent Insurance Agents of Texas.
While brokering, or sharing of commissions between retail insurance agents was not allowed in Texas for many years, that’s not the case today, Loftis said during a presentation at the IIAT’s 2014 annual conference in San Antonio.
“Sharing of commissions between agents or brokering a big account, that’s probably the most cut and dried easiest thing to talk about today. There are no regulations. … That’s between you and the agent that you’re brokering business with,” Loftis said.
Where it gets tricky is when you want to pay, or compensate in any form, an unlicensed person or entity for referral business.
“Generally the law says — it’s really pretty specific — you can’t pay anything to anyone for the production of business unless that entity or individual is licensed as an insurance agent,” said IIAT President David VanDelinder.
The Texas Department of Insurance recognizes that almost everyone in business relies on referral sources for business production, Van DeLinder said during the conference presentation.
As such, regulators “are willing to turn their heads on this issue as long as you’re not paying just for business written,” he said.
In other words, it’s OK to pay for referrals from sources not licensed by TDI, as long as the payment is not directly related to actual business written.
“A fee you pay to a real estate agent for names for potential business is probably okay from TDI’s standpoint as long as you’re not paying for each individual account you write,” he said.
Van DeLinder cited as an example of unsanctioned activity an agent who had been paying a car dealer for referrals, but the agent was compensating the dealer only for accounts he wrote from those referrals.
“That’s illegal,” Van Delinder said.
It’s a problem when you tie the compensation to the business you write instead of just for all referrals received, he said.
Loftis said the association fields a lot of call on rebates, particularly as to what’s allowed and what is not.
Rebating, defined as “providing valuable consideration to an unlicensed customer for the purpose of inducing the purchase or renewal of insurance,” can take a lot of forms, he said. “It doesn’t have to be just cash.”
Reduced commissions, presents, entertainment, contributions or even free use of an agency’s facilities can be considered rebates, and are prohibited.
Basically, the provision by the agent for free of anything that a customer would have to pay for otherwise, including something as small as a notary service, could be considered a rebate.
Loftis described an instance in which an IIAT member agent allowed a client to use the agency’s facilities for a meeting space, and another agent reported the IIAT member to the insurance department.
“Fortunately, the [member] agent had done the right thing. He had charged a reasonable fee to his client for the use of his meeting facility,” Loftis said. “Had he not done that we feel like that agent probably would have been in violation. That would have been considered rebating.”
Even loss control services, which are sometimes provided by agencies to their commercial customers, under certain circumstances could be considered rebates, Van DeLinder said. The determination as to whether or not the provision of loss control services is rebating is not as clear as say, offering something — cash for instance — in return for the purchase of a policy. That’s because the loss control could be a service provided under a policy that is sold.
“I think in the eyes of TDI … it would be the extent to which you’re [providing] the services,” Van DeLinder said. “Are they truly part of the service you’re providing with the policy or is this something separate?”
When it comes to entertaining a client, whether or not it is an allowed activity has a lot to do with timing and circumstance, Loftis said.
For instance, are you taking your client to play golf “two weeks before renewal on your largest account and you make a proposal? Or is your account your next door neighbor and you normally go play golf together? Is this six months after renewal? Loftis said.
TDI would be looking closely at these factors to determine whether such an outing would be an inducement and/or a rebate, he said.
While some states have done away with rebating laws, the majority of states, including Texas, have not. They exist, really, to protect the agent from being taken advantage of by a customer, Van DeLinder said.
Promotions, Giveaways and Rewards
In the 2013 legislative session, Texas lawmakers passed Senate Bill 840, which addresses items given to consumers for promotional, advertisement or educational purposes, Loftis said.
It says that promotional, advertising, educational, or traditional courtesy items commonly extended to consumers that are valued at $25 or less are not considered rebates and are allowed under the law. Trinkets from a trade show, for example, would fall into the category.
It is also permissible for agents to offer a reward to people for allowing the agent to quote their insurance, Van DeLinder said, “as long as it’s done for a quote and not for the result of that quote.”
Offering something in return for the ability to quote “is not a problem within the statute at all. … If you tie it back to selling, then you have a problem,” he said.
Contests, sweepstakes and giveaways are commonly used as rewards for quoting, Van Delinder said. From the standpoint of the insurance department, those kinds of things are legal, as long as they’re done solely for a quote.
“And you have to do it for everyone who asks for a quote,” he said.
The problem, he said, arises from the fact that those practices also are governed under the state’s business and commerce code.
“The legislature has set up some very elaborate rules for running a sweepstakes in your business or agency or having a lottery. … Because consumers we know have been ripped off many times by these schemes,” Van DeLinder said.
Because the rules are very complicated, Van DeLinder recommended that agents seek legal advice before conducting a sweepstakes or lottery.
Note: On its website, www.iiat.org, under the “Resources” menu, the IIAT provides more complete information on the above topics in the “Laws & Regulations” section.